ICICI Securities Says ‘Hold’ on Newgen Software with a Target Price of ₹1260

ICICI Securities has recommended a “Hold” rating for Newgen Software Technologies with a target price of ₹1260 in their report dated October 16, 2024.

Strong Revenue Growth

Newgen reported impressive revenue growth of 23.2% year-on-year, driven by license sales, which soared by 56%. This growth was mainly seen in the Asia-Pacific (APAC) region, which grew by 53%, along with good performances in EMEA (21.3%), India (18.9%), and the US (16.7%). However, annuity revenue growth slowed to 14% year-on-year due to delays in executing large deals. Once these deals are implemented, ATS revenue is expected to improve. Additionally, SaaS revenue growth of 12.4% was lower due to fewer new clients in the US.

Focus on New Markets

Newgen is now concentrating on expanding its health-insurance and government segments, rather than relying solely on banking, which currently accounts for about 72% of its revenue. The company has introduced new solutions to suit each market in the health-insurance sector. Recently, Newgen secured two significant deals: one worth ₹0.25 billion from a large insurance company in India and another from a client in the Middle East. The management is optimistic about closing more deals in these sectors in the second half of the fiscal year.

Continued Demand in Banking

Demand in the banking sector remains strong, especially in EMEA. In India, there is increasing interest in captive finance and trade finance solutions, with a growing need for lending and supply-chain finance.

Healthy Order Book and Pipeline

The order book grew by 22% year-on-year in the first half of FY25. The pipeline for traditional markets is also expanding well, with revenue in financial services diversifying across various solutions. Management expects to see an increase in deal velocity in the US during the second half of FY25. They recently secured a large deal worth USD 1.5 million to provide an Enterprise Content Management Solution to a top US financial institution in Q2 FY25.

Improved Margins

The EBITDA margin rose sharply by 350 basis points year-on-year to 23%, mainly due to a higher share of product license revenue, which has better margins. Research and development (R&D) expenses made up 9% of sales, while sales and marketing costs were 22%. The company aims to maintain an EBITDA margin of over 23% while investing in marketing to boost sales.

New Product Launches

In Q2 FY25, Newgen launched several new solutions and product versions, including Islamic retail lending, captive finance management, enhanced video KYC, a new version of its content management platform, and an updated version of Newgen Marvin, its AI platform.

Risks and Opportunities

Downside Risks:

1. High competition, especially from larger, consolidated companies.
2. Economic challenges in key markets like India and EMEA.

Upside Opportunities:

1. Continued strong economic trends in India and EMEA.
2. A quicker-than-expected recovery in the US market.